Cempra Inc (NASDAQ:CEMP) just announced that it may not meet its PDUFA for solithromycin, and the company has taken a big hit on the news. The response is somewhat justifiable – the implications of the delay extend beyond the time frame that the delay will likely cause (for reasons we will get into in a little more detail shortly) – but the magnitude is probably overenthusiastic, and we think there’s an opportunity to get in ahead of a recovery at a discounted price.
Here’s what we know, what we don’t, and where we think things are heading.
So, let’s start with the drug.
As mentioned, it’s called solithromycin, and it’s targeting the treatment of community-acquired bacterial pneumonia (CABP). The company submitted an NDA to the FDA earlier this year, and the latter accepted the submission in June; at which point, the agency set a PDUFA date of December 27 and 28, this year. Ahead of this PDUFA, the FDA set an advisory panel meeting, which will take place on November 4.
Everything looked as though it was running smoothly, until Cempra put out its latest business update and held a conference call to discuss the details of the update. Specifically, the company noted (and it did so only in the call, not the press release) that certain manufacturing related issues may delay the original PDUFA date.
Here’s a quote from the transcript:
Based on an in person meeting held with the FDA in late October, we currently believe the FDA may not allow us to use API (active pharmaceutical ingredient) produced by Wockhardt for approval and commercial supply of solithromycin, and we are preparing to provide the FDA with data from API that we are manufacturing with another API supplier. We believe that the FDA’s concerns with Wockhardt’s operations and facilities are related to the GMP quality systems at Wockhardt, and not specifically focused on Cempra’s product or processes.
There are a few things worth touching on here.
First, that it looks to be a problem with the manufacturer, and not the drug itself, but – and this is important – this is not confirmed yet. If it is a manufacturer issue, it’s not too big of a problem. If it turns out to be to do with solithromycin, we could be looking at a major delay. Let’s assume it is the former, however, and move forward with this assumption. The second focal point is that Cempra has already started to set up manufacturing at another site (and this was initiated before the company became aware of the Wockhardt issue) meaning the transfer of manufacturing shouldn’t be too far down the line, although this will necessitate a resubmission of certain parts of the NDA. Management suggested that this resubmission is already in progress, but we reckon it could add a minimum of one or two quarters onto the proposed approval period.
As we said in in the introduction to this piece, such a delay is made worse by the fact that this type of indication is extremely seasonal. If Cempra misses this winter – and it’s looking pretty much a dead cert that it will – the company is not going to see any substantial revenues from solithromycin before late 2017. If management could put operations on hold between now and then, this wouldn’t be an issue. However, the company has been ramping up its workforce in anticipation of a winter 2016 sales push.
This is why we say that the decline is probably justifiable, but it is a short-term issue, and beyond the initial delay, we don’t really see any problem. That is, assuming the company can get its NDA back on track.
The key risk here is rooted in two fronts: the first, is the issue with solithromycin or Wockhardt? We’re giving the company the benefit of the doubt on this one, because the move to put a second facility in place came ahead of the Wockhardt issue. The second is in the cost side of the equation. The company has around $250 million cash on hand right now. That’s not half bad for an entity of this size, at this end of the biotech space, but it’s going to have to spend a large portion of that cash commercializing solithromycin if/when it picks up an FDA green light. The more this delay costs, the less funds will be available for commercialization.
Bottom line, we think there’s an opportunity here. Market cap has taken a hit, but if the company can limit the outlay associated with the delay, there’s almost certainly a recovery (and more) on the cards.